In Haas v. Gunasekaram, 2016 ONCA 744, the Ontario Court of Appeal recently held that claims in tort and fraud, and resulting claims to set aside the agreement between the parties, were within the jurisdiction of the arbitral tribunal under an arbitration agreement. Accordingly, the court action between the parties was stayed.

This decision is important due to the pro-arbitration principles of contractual interpretation which the Court of Appeal adopted, and due to its finding that the claims in tort and fraud – which are often found to fall outside arbitration clauses – were properly within the jurisdiction of the arbitral tribunal.

Background

The four parties to the actions were shareholders in a company which started a restaurant. They entered into a shareholders agreement which contained an arbitration clause. The arbitration clause read as follows:

If at any time during the currency of this Agreement, or after the termination hereof, any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator to be appointed by the parties to the dispute within ten (10) days of such referral… [underlining added.]

The restaurant failed and Mr. Haas brought an action against the other three shareholders claiming that he had been induced to enter into the shareholders’ agreement by fraudulent misrepresentations. The defendants brought a motion to stay the action, submitting that the claim must be dealt by way of arbitration. The judge hearing the motion dismissed it on the ground that Mr. Haas’ claims fell outside the arbitration agreement. The Court of Appeal allowed the appeal.

Decision of the Court of Appeal

The decision of the Court of Appeal contains the following elements:

A broad interpretation should be given to the arbitration agreement. The court said:

“The law favours giving effect to arbitration agreements. This is evident in both legislation and in jurisprudence……the statutory language in s. 7 of the current Arbitration Act is directory, not equivocal. It strongly favours giving effect to an arbitration agreement. This policy direction is reinforced by s. 17 of the Arbitration Act [which authorizes the arbitral tribunal to rule on its own jurisdiction]….. The same pro-arbitration orientation is found in the jurisprudence…. It is now well-established in Ontario that the court should grant a stay under art. 8(1) of the Model Law where it is ‘arguable’ that the dispute falls within the terms of an arbitration agreement…. [quoting from the decision in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.), at paras. 39-40]: ‘Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings….Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal….’a deferential approach’ allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ‘is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.’”

The court’s review of the misrepresentations alleged by Mr. Haas showed that they largely related to the defendants’ failure to perform their obligations under the shareholders’ agreement. There was only one alleged misrepresentation relating to conduct before the shareholders’ agreement, that the proposed location had a proven track record of successful restaurants. To establish his case, Mr. Haas would be relying on the contractual documents.

The court considered that the arbitration agreement was “broad in scope.” It particularly referred to the words “if any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained.”

The court held that tort claims do not automatically fall outside an arbitration agreement. As long as “either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it” or “the matter in dispute is referable to theinterpretation or implementation of some provision of the Agreement” or “the claim …relie[s] upon a breach of the contract as the source of the unlawfulness to ground” the claim, then a broadly based arbitration agreement applies. The court also echoed the caution cited in other cases that the court should “be wary of cases in which a party to an arbitration agreement seeks to avoid it by pleading a common law tort”

The court also held that the plaintiff’s claim that fraud vitiated the agreement between the parties did not mean that the arbitral tribunal lacked jurisdiction. It just meant that the tribunal had the authority to decide that issue under section 17 of the Arbitration Act, 1991. That section enacts the competence-competence principle, namely that the arbitral tribunal has authority to decide its jurisdictional competence. In conclusion, the court said:

“Put simply, in cases involving arbitration agreements, fraud does not necessarily vitiate everything. It is a matter of interpretation. The arbitration agreement in this case contains broad language, referring to “any dispute, difference or question…or any failure to agree…respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator. There is no exclusion for tort claims, misrepresentation or fraud.”

Discussion

The Court of Appeal’s finding that the arbitration agreement was a “broad” one is useful to those relying on arbitration agreements. The court might have taken a different view. The word “arise” is not as broad as, say, “relating to”, and the words “respecting this Agreement or anything herein contained” could arguably limit the arbitration to contractual disputes, and nothing more. Nevertheless, the court held that these words established a “broad” arbitration clause.

The Court of Appeal’s conclusion that tort and fraud claims fall within the arbitration clause – at least to the extent of the arbitral tribunal’s entitlement to first determine whether they do – is very significant. This decision effectively over-rules or calls into question prior lower court decisions that, in less arbitration-friendly days, held to the contrary.

The key to the decision is, of course, the competence-competence principle. Once the tort and fraud claims arguably fall within the arbitration agreement, then the court must allow the arbitral tribunal to first decide whether they do or not. At that point, the court’s work is done, until the tribunal makes a decision on that issue which is brought back to the court for review. It is the direction of the legislature in section 17 of the Act – adopting the competence-competence principle –and the obligation of the court to apply that principle that results in the modern “hands off” attitude of courts toward arbitration. That attitude is one of the defining elements of the modern law of arbitration.